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Iceland-Ireland Again

February 26, 2011 9:17 amFebruary 26, 2011 9:17 am

Via the Irish Economy, I see that there have been twoarticles in the Irish Times comparing Iceland and Ireland, and concluding that Iceland did no better. The articles aren’t
bad — but need to be read with caution. Specifically, I’d make four counter-arguments:

1. It’s telling that Ireland now consoles itself by comparing itself to Iceland. Remember, two years ago the notion that Ireland might do as badly as Iceland was considered gallows humor — no way it could really be that bad.

2. Iceland did somewhat worse than Ireland in terms of GDP, but better in terms of employment. Well, employment matters much more for peoples’ sense that the economy is working. By all accounts, there’s
just a lot less misery in Iceland, despite a sharp drop in consumption.

3. Iceland has more or less resolved its crisis; Ireland, famously, has not, as shown by the CDS spread:

4. Maybe most importantly from my point of view, comparing export growth — which looks similar in the two cases — is misleading, because Iceland is a very open economy. This has two implications. First,
it’s harder to achieve a given percentage increase in exports once you’re already exporting a large share of output. Second, if what you’re interested in is supporting demand for domestic goods,
a given percentage change in exports matters more.

One way to see this latter point is to compare net exports with GDP in the lands of ice and ire:

EurostatNet exports as % of GDP

Iceland’s positive swing has been about twice as large as Ireland’s — and we’re talking an extra 10 points of GDP here. That’s a lot of extra stimulus, and to the extent that it was
due to devaluation, that’s a major plus for having your own currency.